The new super landscape - an overview of the new rules full article
The majority of the superannuation reforms which were announced in the 2016 Federal Budget have taken effect from 1 July 2017. The changes are complex and the affect on individuals and SMSFs varies depending on their individual circumstances.
Non-concessional contribution cap reduced
Non-concessional contributions are personal contributions made from an individual’s aftertax income which are not included in the superannuation fund’s assessable income. All individuals under the age of 65 and those aged 65 to 74 who satisfy the work test (40 hours over a 30 day period) are eligible to make non-concessional contributions.
From 1 July 2017 the annual non-concessional contribution cap is $100,000 for individuals who have a total super balance less than $1.6 million at 30 June of the previous financial year. Individuals who have a total super balance greater than $1.6 million are not eligible to make non-concessional contributions from 1 July 2017.
Eligible individuals under the age of 65 can access a bring forward period for their non-concessional contribution cap either equal to 2 years $200,000 or 3 years $300,000 depending on their total superannuation balance.
As the bring forward rule prior to 1 July 2017 allowed a 3 year cap of $540,000, transitional rules will apply if the bring forward rule was triggered in 2015/2016 or 2016/2017 and the full cap wasn’t contributed by 30 June 2017.
Concessional contribution cap reduced
Concessional contributions are made from pre-tax income (employer contributions, salary sacrifice contributions and personal deductible contributions) and are included in the superannuation fund’s assessable income and taxed at 15%. Contributions can be accepted for anyone up to age 65. From 65 to 74 concessional contributions can only be accepted for individuals who satisfy the work test (40 hours over a 30 day period) and from age 75 only ‘mandated’ employer contributions can be accepted. From 1 July 2017, the concessional contributions cap has been reduced to $25,000 for everyone, irrespective of age.
Greater deductibility of personal contributions
The requirement that an individual must earn less than 10 per cent of their income from employment to be able to be able to claim a personal superannuation contribution has been removed.
From 1 July 2017 all taxpayers under the age of 65 will be able to claim a tax deduction for personal super contributions. Taxpayers aged 65 to 74 will also be able to claim personal super contributions provided they have met the work test (40 hours over a 30 day period).
This change will enable more people to be able to make personal deductible contributions and make greater use of the cap that applies. In the past this has only been available to employees whose employers offered salary sacrifice arrangements or individuals who were self-employed or not in receipt of salary and wage income.
Introduction of a pension transfer balance cap
The total amount of super monies that can be transferred to pension phase will be capped at $1.6 million (per person limit). The Government claims that $1.6 million can provide a generous retirement income of around four times the level of the single aged pension and almost three times the ‘comfortable’ lifestyle standard identified by the Association of Superannuation Funds of Australia.
Amounts exceeding the $1.6 million transfer cap won’t have to be withdrawn from the super system. The excess amount can be held in an ‘accumulation’ account where earnings are taxed at a maximum rate of 15%. Alternatively the excess can be cashed out and invested outside super where the taxpayers marginal tax rate is less than 15%.
Transition to retirement pensions lose income tax exemption
A transition to retirement (TRIS) pension is a pension that has been started with superannuation money after a taxpayer has reached preservation age but has not yet retired.
From 1 July 2017 the tax paid on earnings from investments held in transition to retirement income pensions will increase from 0% to a maximum rate of 15%.
Despite the super reforms a transition to retirement pension may still be tax effective where they are used for their intended purpose, which was to allow taxpayers approaching retirement to replace income to maintain their lifestyles whilst reducing working hours.
However, in a large number of cases a transition to retirement pension may have been implemented as a tax effective strategy to reduce personal tax whilst increasing retirement savings without reducing hours worked or take home pay. The super reforms impact this strategy in a number of ways including the reduced concessional contribution cap and the loss of the income tax exemption for the super fund. From 1 July 2017 it is expected that this strategy may no longer be viable for some taxpayers (particularly those under the age of 60 or those with earnings greater than $250,000 pa).
New low income super tax offset contribution
From 1 July 2017, eligible individuals with an adjusted taxable income up to $37,000 will receive a low income superannuation tax offset (LISTO) contribution to their super fund. The LISTO contribution will be equal to 15% of total concessional super contributions paid for an income year, capped at $500. LISTO will be paid by the ATO as a contribution into the super fund account which will offset the tax the superannuation fund pays on the contributions.
Changes to spouse contribution tax offset
Prior to 1 July 2017 taxpayers could claim a tax offset of up to $540 on super contributions of up to $3000 they made on behalf of their spouse whose income was less than $10,800. From the 1 July 2017 this threshold will increase to $37,000. The offset is gradually reduced for income above this level until it completely phases out at incomes above $40,000.
Contributing the proceeds of downsizing to superannuation
From 1 July 2018, Australians aged 65 years or older will be able to make a nonconcessional (after-tax) contribution into their super account of up to $300,000 from the sale proceeds of their family home if they have owned the property for at least 10 years.
These contributions will not count towards the non-concessional contribution cap and the individual making the contribution will not need to meet the existing maximum age, work or $1.6m balance tests for contributing to super. Both members of a couple can contribute to super under this policy from the proceeds of the sale.
First Home Super Saver Scheme
From 1 July 2017, individuals can make voluntary contributions of up to $15,000 per year and $30,000 in total, to their superannuation account to purchase a first home.
These contributions, which are taxed at 15 per cent, along with deemed earnings, can be withdrawn for a deposit. Withdrawals will be taxed at marginal tax rates less a 30 per cent offset and allowed from 1 July 2018. For most people, the First Home Super Saver Scheme could boost the savings they can put towards a deposit by at least 30 per cent compared with saving through a standard deposit account. This is due to the concessional tax treatment and the higher rate of earnings often realised within superannuation.
Many employees will be able to take advantage of salary sacrifice arrangements to make pre-tax contributions. Individuals who are self-employed or whose employers do not offer salary sacrifice can claim a tax deduction on personal contributions, meaning savings effectively come out of pre-tax income.
Voluntary contributions under this scheme must be made within existing superannuation caps. The total concessional contributions an individual can make, from both compulsory employer contributions and voluntary contributions, including those made under the scheme cannot exceed $25,000 in 2017- 18.
The First Home Super Saver Scheme will be administered by the ATO, which will determine the amount of contributions that can be released and instruct superannuation funds to make these payments accordingly.
How much is enough?
The amount of super you need depends on how long you live, what age you plan to retire, what type of lifestyle you want in retirement and your future medical costs. The ASFA Retirement Standard benchmarks the annual budget needed to fund either a comfortable or modest standard of living in retirement. It is updated quarterly to reflect inflation, and provides detailed budgets of what singles and couples would need to spend to support their chosen lifestyle.
A modest retirement lifestyle is considered better than the Age Pension, but still only able to afford fairly basic activities. Singles will need income of $24,250 and couples $34,855 per annum to fund a modest retirement lifestyle. A modest lifestyle is mostly met by the Age Pension and supplemented with other retirement savings.
A comfortable retirement lifestyle enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel. Singles will need an income of $43,665 and couples $59,971 per annum to fund a comfortable retirement. ASFA estimates the lump sum needed to support a comfortable lifestyle for a couple is $640,000 (or $545,000 for a single person) assuming a partial Age Pension.
For above average income earners, they will need 67% (two-thirds) of their post retirement annual income in order to maintain the same standard of living in retirement.
Centrelink asset test changes 1 July 2017
The assets test is used to work out two things:
1) Your eligibility for the Government Age Pension, and
2) If you are eligible, how much Age Pension you can receive each fortnight.
From 1 July 2017, pensions will reduce when your assets are more than the amounts below.
From 1 July 2017, part pensions cancel when your assets are more than the amounts below.